Here come more rubbery figures

By Tim Colebatch, Canberra

OVER in Politics Land, they want to know how big the Federal Government's budget surplus will be. Well, one thing is pretty certain: it will be much bigger than the budget documents say.

Over the past five years, on average, the budget papers have understated the surplus for the coming financial year by $12 billion, after including later policy changes.

In reality, a budget surplus simply means the Government taxes us more than it spends. That's good at times, and Reserve Bank governor Glenn Stevens has argued that this is one of them.

But as Stevens also points out, running perpetual surpluses tell us that taxes are too high (or spending is too low, or both).

To an economist, there's no particular virtue in that. It's just seen politically as virtuous.

Advertisement

Detailed figures published in the budget papers show that, even after adding billions of dollars a year in extra spending as it went along, the Howard government still finished with surpluses billions of dollars higher than Treasury forecast solemnly in the budget papers.

In 2006-07, for example, then treasurer Peter Costello told us on budget night that the surplus would be $10.8 billion. As the year went on, the government kept making new spending decisions, which cut $6.2 billion. Yet when the year ended, instead of being $4.6 billion as you might expect, the surplus finished up as $17.2 billion.

That was normal. A year earlier, Costello told us the surplus would be $8.9 billion, the government then spent $7 billion it hadn't budgeted for, yet we ended with $15.8 billion surplus.

Rubbery figures? They don't get more rubbery than Treasury's forecasts of the budget surplus. On budget night, whatever Treasurer Wayne Swan tells us the surplus will be, you know it won't be so. On past form, it will be much more.

Treasury is full of very bright people. They have lots of corporate knowledge on how to forecast revenue and spending. How could they keep getting it so wrong? Three reasons stand out:

■ Economists will tell you that forecasting is difficult, even more so when you have to forecast a bottom line like this. True, but if it were simply human error, the errors would be in both directions equally.

In fact, in the past 12 years, Treasury has delivered one very small overestimate, and 11 mostly large underestimates. That explanation fails the test.

■ No one forecast the huge surge in mineral export prices, especially for coal and iron ore. The head of Treasury's macro-economic team, David Gruen, estimated last month that the terms of trade (the ratio of export prices to import prices) shot up 41% in the five years to 2007.

Given that trade provides about 20% of our income, that alone has lifted our incomes 8%  and in 2008-09, this is tipped to swell again, lifting the nation's pay rise above 10%.

But does that explain it? No. Company tax revenue has risen spectacularly in that time, doubling to $57 billion a year. That took Treasury by surprise for a couple of years, but in the past three years its company tax estimates have been pretty good.

Even over the five years, company tax windfalls explain only 20% of the forecast error. That explanation also fails the test.

■ Treasury gets the bottom line "wrong" because that's its goal. It is not trying to estimate what the surplus will be but rather what it would be in a worst-case scenario. And its state counterparts do just the same.

That's why John Brumby in his Treasury days kept telling us his surplus would be about $300 million, yet it always finished up at $1 billion or more.

Budget surpluses have become a fetish in Australia. If Treasury overestimates the surplus, it and the Government look bad, even incompetent. If it underestimates the surplus, it and the Government look like a safe pair of hands.